CWA/ICWA Inter :: Management Accounting—Performance Management : June 2007

I—9(MPM)
Revised Syllabus

Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks
Answer Question No. 1 which is compulsory and any five from the rest
Marks
1. (a) Fill in the blanks:
(i)Qualification shares are the shares, which a person must hold to be eligible for ______
(ii)All activities are revaluated each time when a budget is set is known as ________
(iii)A profit centre whose performance is measured by its ROI is known as ____________
(iv)Stepping Stone Method is a procedure for improving the cost in the _____________
(v)A Budget continuously updated by adding/deleting accounting period is known as ______
1x5
(b) Match each expression under column I with column II:
Column IColumn II
(i)Management Principles(a)Lower investment in stock
(ii)Simulation(b)Resudual Income
(iii)JIT(c)Management by exception
(iv)Investment Centre(d)Division of work
(v)Variance Analysis(e)Duplicating the real situation
1x5
(c) Which of the following statements are TRUE or FALSE:
(i)Cost Reduction and Cost Control are one and the same thing.
(ii)The Purchase Department should not be held responsible for material mixture variance.
(iii)VAM techique always gives the optimum solution to Transportation problems.
(iv)Benchmarking cannot be used as a tool in the establishment of standard manufacturing cost.
(v)In break even analysis it is assumed that variable costs fluctuate inversely with volume.
1x5
(d) Define the following terms in not more than two sentences:
(i)TQM
(ii)Slack variable
(iii)ERP
(iv)Benchmarking
(v)Activity based Budgeting.
1x5
2. (a) "Profitability alone cannot be the sole criteria for measuring the performance of any public undertaking." — Comment on this statement. 6
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( 2 )

I—9(MPM)
Revised syllabus
Marks
(b) OPTIMAX MATUAL FUND Company has Rs. 30 lakhs available for investment in Government bonds, Blue chip stocks, Speculative stocks and Short term deposits. The annual expected return and risk factor are given below:
Type of InvestmentAnnual Expected
Return (%)
Risk Factor
(0 to 100)
Government bonds
Blue chip stocks
Speculative stocks
Short term deposits
12
20
24
10
12
24
48
6
12
Mutual Fund is required to keep at least Rs. 4 lakhs in short term deposits and not to exceed average risk factor of 42. Speculative stocks must be at most 20% of the total amount invested.

How should OPTIMAX MUTUAL FUND Company invest the funds so as to maximise its total expected annual return? Formulate this as a Linear Programming Problem. You are not required to solve the LPP.

3. (a) The following table shows all the necessary information on the availability of supply to each factory of Agro Industries Ltd., the requirement of each destination and the unit transport cost (in Rs.) from each factory to each destination:
Destination
Factory
A
B
C
Demand
I
5
6
3
75
II
1
4
2
20
III
7
6
5
50
Supply
10
80
15
10
Since there is not enough supply, some of the demands at three destinations may not be satisfied. For the unsatisfied demands, penalty costs be Re. 1 Rs. 2 and Rs. 3 respectively.

Find the optimal allocation that minimize the transportation and penalty costs by using the Vogel's Approximation Method (VAM)

(b) Arrivals of cars at Jaya Petrol Station are considered to be Poisson, with an average time of 12 minutes between one arrival and the next. The length of filling petrol is assumed to be distributed exponentially with mean of 3 minutes.
(i)What is the probability that a car arriving at the petrol pump will have to wait?
(ii)What is the average length of non-empty queues?
(iii)The owner of the petrol station will instal a second petrol pump when convinced that an arrival would expect waiting for at least three minutes for service.

By how much should be the flow of car arrivals increase in order to justify a second pump? You may assume that the conditions of a (M/M/1) queue system is applicable.

6
4. (a) X Ltd. manufactures three components used in its finished product. The component workshop is currently unable to meet the demand for components and the possibility of sub-contracting part of the requirement is being investigated on the basis of the following data:
(Per Unit)
Component A
Rs.
Component B
Rs.
Component C
Rs.
Variable cost of Production
Fixed cost of Production
Outside purchase price
Machine hours per unit
Labour hours per unit
3.00
1.00
2.50
1
2
4.00
2.00
6.00
0.5
2
7.00
4.00
13.00
2
4
6
You are required:
(i)To decide which component should be bought out if the company is operating at full capacity.
(ii)to decide which component should be bought out if production is limited to 4000 machine-hours per week.
(iii)To decide which component should be bought out if production is limited to 4000 labour-hours per week.
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( 3 )

I—9(MPM)
Revised syllabus
Marks
(b) Futura Ltd., a manufacturing company, having a capacity of 7 lakh units has prepared the following cost sheet:
(per Unit)
Rs.
Direct Material
Direct Wages
Factory Overheads
Selling and Administration
Overheads
Selling Price
:
:
:
:
:
:
30
12
30 (50% Variable)
18 (Two-third Fixed)
120
10
During the year 2006-07 the Sales Volume achieved by the company was 6 lakh units. The company has launched an expansion programme, the details of which are as under:
(i)The capacity will be increased to 12 lakh units.
(ii)The additional fixed overheads will amount to Rs. 50 lakhs upto 10 lakh units and will increase by Rs. 25 lakh more beyond 10 lakh units.
(iii)The cost of investment of expansion is Rs. 100 lakhs which is proposed to be financed through Bank borrowings carrying interest at 15% per annum.
(iv)The average depreciation rate on the new investment is 15% based on straight line method.
After the expansion is put through, the company has two alternatives for operations:
(i)Sales can be increased up to 10 lakh units by spending Rs. 10,00,000 on special advertisement campaign to explore new market.
(ii)Sales can be increased to 12 lakh units subject to the following:
By an overall reduction of Rs. 10 per unit on all the units sold
By increasing the variable selling and administration expenses by 8%
The direct material costs would go down by 1.5% due to discount on bulk purchasing.
Requirements:
(i)Construct a Flexible Budget at the level of 6 lakhs. 10 lakhs and 12 lakhs unit of production.
(ii)Calculate Break Even Point before and after expansion.
(iii)Advise the optimum level of output for expansion.
5. (a) The share of production and cost based fair price computed separately for a common product for each of the four divisions of a company are as follows:
Divisions
(Figs. in Rs.)

Share of production %
A
40
B
25
C
20
D
15
Direct Materials
Direct Labour
Depreciation
Other Overheads
30
20
60
60
36
24
40
60
34
28
32
56
38
32
20
48

20% return on Capital employed
170
126
160
86
150
70
138
46
Fair price 296 246 220 184
Capital Employed per unit
Net Fixed Assets Rs. per unit
Working capital Rs. per unit
600
30
400
30
320
30
200
30
Total capital (Rs. per unit) 630 430 350 230

The Company wants to fix an uniform price for the product. Advice the company.

5
(b) Megatron Ltd. is having production shops which are cost centres. Each shop charges other shops for materials supplied and services rendered.

The shops are motivated through goal congruence, autonomy and management efforts. Megatron Ltd. is having a welding shop and painting shop. The welding shop welds annually 7,50,000 purchased items with other 15,00,000 shop made parts into 1,20,000 assemblies.

The assemblies are having variable cost of Rs. 19 each and are sold in the market at Rs. 24 per assembly. Out of the total production, 80% is diverted to painting shop at same price ruling in the market. Welding shop incurs a fixed cost of Rs. 5,00,000 per annum.

The painting shop is having a fixed cost of Rs. 6,00,000 and its cost of painting including transfer price from welding shop comes to Rs. 40 per unit. The painting shop sells all units transfer to it by welding shop at Rs. 50 per assembly.

Requirements:
(i)Find out profit of individual cost centres and overall profitability of the company.
(ii)Recommend course of action, if painting shop wishes to purchase its full requirement either from open market (@ Rs. 20 per assembly) or from welding shop at Rs. 20 per assembly.

Give reasons for your recommendation.

11
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I—9(MPM)
Revised syllabus
Marks
6. (a) Explain the concepts of Activity Based Costing and cost drivers. 4
(b) Fasteners Ltd. produces and sells four products A, B, C and D. Details of the four products and relevant information are given below for week ended 28th April 2007.
Products
Output (units)
Cost per unit: (Rs.)
A
120
B
100
C
80
D
120
Direct Material
Direct Labour
Machine-hours (per unit)
40
28
4
50
21
3
30
14
2
60
21
3
12
The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units

The Production overheads during the period are as follows:
Rs.
Factory works expenses
Set up costs
Stores receiving
Inspection/Quality control
Material handling and dispatch
20,860
10,500
7,200
4,200
9,240

The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units

The Production overheads during the period are as follows:

The production overhead is currently absorbed by using a Machine-hour rate and the company wishes to introduce Activity Based Costing (ABC) system and has identified major cost pools for production overheads and their associated cost drivers.

Information in these activity cost pools and their drivers is given below:
Activity Cost Pool Cost Drivers
Factory Works Expenses
Set up Costs
Stores receiving
Inspection/Quality Control
Material handling & dispatch
Machine-hours
Number of Production runs
Requisitions raised
Number of production runs
Number of orders executed

The number of requisitions raised on the stores was 20 for each product and number of orders executed was 42, each order being for a batch of 10 of a product.

Requirements:
(i)Total cost of each product assuming the absorption of overhead on Machine-hour basis.
(ii)Total cost of each product assuming the absorption of overhead by using activity Based Costing.
(iii)Show the differences between (i) and (ii) and Comment.

7. (a) The Chief cost Accountant of M/s XYZ Ltd. found to his surprise that the actual profit for the period ending 30th June 2006 was the same as budgeted inspite of realising 10% more than the budgeted selling prices.

The following were the results:
ParticularsBudget
(Rs.)
Actual
(Rs.)
Sales
Variable cost of sales
Fixed costs
Profit
5,00,000
3,00,000
1,00,000
1,00,000
8,25,000
5,75,000
1,50,000
1,00,000

You are required to assist the Chief cost Accountant in preparing the necessary explanations as to why the profit remained the same despite an increase in sales.

9
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( 5 )

I—9(MPM)
Revised syllabus
Marks
(b) X Ltd. manufactures special purpose gauges to customer specifications. The highly skilled labour force is always working to full capacity and the budget for the next year shows:
(Rs.)(Rs.)
Sales
Direct Materials
Direct Wages (3200 hours @ Rs. 5)
Fixed Overhead
Profit

4,000
16,000
10,000
40,000


30,000
10,000

An enquiry is received from XYZ Ltd. for a gauge which would use Rs. 60 of Direct materials and 40 labour hours.
(a)What is the minimum price to quote of XYZ Ltd?
(b)Would the minimum price be different if spare capacity were available but materials were subject to a quote of Rs. 4000 per year?

7
8. Write short notes on the following (any four)
(i)Responsibility Centre;
(ii)Value Engineering;
(iii)Pre-requisites for successful Benchmarking;
(iv)Performance Management;
(v)Activity Base Management.
4x4

__________

 

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